Posted on Fri, Jul. 4, 2008
FRANKFURT, Germany - Wary of rising energy and commodity prices, the European Central Bank raised its benchmark interest rate yesterday a quarter of a percentage point, to 4.25 percent, a move it hopes will help curtail inflation in the 15 countries that use the euro.
The move comes despite worries in some quarters that it could dampen economic growth, but ECB president Jean-Claude Trichet said at a news conference that the fundamentals of Europe's economy "are sound" and that the bank was focused on inflation - which he said could remain high "for a more protracted period than previously thought."
The increase, the first since since June 2007, was widely expected, and Trichet said the decision was unanimous among members of the bank's governing council.
He seemed to imply one increase might be enough: "The monetary-policy stance after today's decision will contribute to achieving our objective of price stability," he said. "I have no bias, and we are never pre-committed."
Howard Archer, the chief British and European economist for Global Insight Inc. in London, took that to mean that the bank had clearly moved itself back into a neutral stance.
"The ECB's statement and Mr. Trichet's comments do little to support the view that this could be the first of a series of interest-rate hikes," he said in an e-mail. "There was no reference to the ECB being in a 'state of heightened alertness' or 'strong vigilance,' thereby suggesting that no further interest-rate hikes are currently planned in the near term at the very least."
Trichet has stressed that his main objective is to keep prices stable, and he all but promised an increase this month at last month's meeting. But he had also suggested that repeated interest-rate increases were not likely.
On Monday, Eurostat, the EU statistics agency, said inflation in euro nations had hit a record 4 percent last month, double the ECB's inflation target of below or around 2 percent.
Last month, Trichet's signal of higher rates sent both the euro and oil up; higher euro-zone interest rates tend to strengthen its currency against the dollar as investors park money where it earns more interest. A sinking dollar, meanwhile, has tended to boost the price of oil.
But his comments yesterday left the euro down at $1.5765 from $1.5888 the evening before.
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